THE DETERMINANTS OF REALIGNMENT EXPECTATIONS UNDER THE EMS - SOME EMPIRICAL REGULARITIES

The stability of the EMS depends crucially on realignment expectations of the market participants. In this paper we discuss how to measure s uch expectations and how to relate them to economic fundamentals, cent ral bank reputation, and institutional arrangements of the EMS. We fin d the following empirical regularities for FF/DM and IL/DM exchange ra tes: (1) expected devaluations are positively related to the current e xchange rate deviation from the central parity; (2) expected devaluati ons are negatively related to the length of time since last realignmen t in the short and medium run; (3) the Basle-Nyborg agreements seem to have a stabilizing effect for both currencies examined, albeit throug h different channels. (C) 1997 Elsevier Science B.V.